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In the level-premium policies, one pays more than the current price of insurance in the initial years but the amount decreases in the later years. The company used to collect more premium than what was required to meet death claims during the early policy years. Consequently, a reserve fund accumulates to one's credit. The policyholder can borrow against his pro rata share of the reserve fund; or if he wishes, he can surrender the policy and collect it as cash value. Collecting more funds than are needed in the earlier years of life creates definite obligations on the part of the company to its policyholders. These obligations are called "policyholders' reserves" or "legal reserves" and are carefully supervised by the state, for the company's solvency depends on the ownership of assets equal to these reserves. The reserves are separate from profits and are not available for distribution as dividends.

When basic premium rates are set, few charges must be added to cover the cost of running the insurance company. This charge is known as the "loading". Efficient companies hold expenses low. Thus, the premium charged to you for life insurance depends on three factors:

(a) The real cost of insurance based on mortality experience,

(b) The return earned on the reserves accumulated under level premium policies,

(c) The costs of running the insurance company.

Premiums do vary from company to company. When comparing rates, use the interest-adjusted index of comparing the costs of similar policies. It enables the consumer to measure value in an industry whose product is multifaceted, which lacks uniform federal regulation, and over which 50 states exercise varying degrees of supervision.


It is preferable, if possible, to pay premiums on an annual basis. However, arrangements can usually be made to pay semiannually, quarterly, or even monthly. In the last two cases, the company does not require the total premium early. Besides, making premium payments each year than a single premium payment, increases the cost of sending out notices and keeping records, so that it may cost you 8 to 10 percent extra to avail yourself of the privilege of making partial payments. Of course, the average person is paid weekly or monthly; and it is quite difficult to pay a large insurance premium at one time, as it is to pay a large real estate or income tax bill. One way to move out of the difficulty is to buy a number of smaller policies, instead of a larger one, and having each payable in a different month, provided, of course, that you stay with ordinary insurance and do not resort to industrial insurance. Each of the smaller policies can be paid on an annual basis, with staggered due dates, thus achieving the economies of annual payment for the policyholder. Only one policyholder in five pays annually - reaping savings that many others could achieve by doing some financial planning.


In a permanent policy, where a cash value has been built up, you don't usually lose the policy. The non-forfeiture provisions come into play. If you are temporarily unable to pay your premiums, you can borrow against the cash value of your policy and thus continue payments through the loan. If it looks as though you will be unable to resume payments, or if you become 65 and you don't want to continue to pay premiums, you can choose one of the various non-forfeiture options. Every type of permanent policy, of which the whole or straight life type is the most popular, has built-in "non-forfeiture values". There are three kinds of non-forfeiture or guaranteed values:

Cash Value

You will get this money if you give up your permanent life insurance policy. The cash value is your share of this accumulation. It will be paid to you as guaranteed in the insurance contract and as required by law. It may be taken as a lump sum or in a series of regular payments over a period of years, providing it amounts to $1,000 or more.

You can borrow against your cash value at any time; if you die before repaying the loan, the payments made to your beneficiaries will be reduced by the amount of the loan. In case of an emergency, the loan proviso of your policy can be used to secure money or to pay premiums due.

Reduced Paid-up Life Insurance

This is non-forfeiture or guaranteed value that you can use if you want to keep some protection but are not in a position to or do not wish to pay any more premiums. The amount of your insurance will be reduced. For instance, if you buy a $1,000 policy at age 20, and then at age 65, you are unable to continue paying premiums because of illness, you could arrange to have $857 of paid-up insurance as long as you lived without any further payments of premiums. That is, if you have a permanent life policy, the paid-up insurance will protect you without further premium payments.

External Term Insurance

Assume that you are not able to pay premiums on your policy but want to continue the protection as long as possible. Extended term insurance gives you continuous protection for the full value of your policy for a limited length of time. The time is determined by the buying capacity of the net cash value when it is used alone to buy the extended term protection at your attained age.